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It's Time to Take a Closer Look at Insurance Exchanges

Aside from the public option, the Democrats' effort to control insurance costs for individuals and small businesses focuses on insurance exchanges that would offer them a wide range of health plans (possibly including a public plan) and would pool participants to get group insurance rates. These exchanges, featured in the House and Senate reform bills, superficially resemble the Federal Employee Health Benefit Program. However, because federal employees--as well as members of Congress--must use the FEHBP if they want the government to help pay for their coverage, the federal employee program is actually quite different from what is proposed in the reform measures. Those proposals contemplate something that's more like the small business health insurance purchasing cooperatives of the 1990s--most of which went under because of adverse selection.

Peter Lee and John Grgurina analyze the insurance exchange proposals and make some pertinent suggestions for fixing them in a Health Affairs blog entry. These gentlemen are exceptionally well-informed on the subject, because they helped run the largest small business insurance purchasing alliance in the country--California's PacAdvantage (originally Health Insurance Plan of California), which expired in 2006. Lee is currently executive director for national health policy of the Pacific Business Group on Health, and Grgurina is CEO of the San Francisco Health Plan, that city's effort to cover its uninsured population.

These experts' basic contention--which echoes a recent California Healthcare Foundation report on the same subject--is that insurance exchanges cannot succeed unless the government lays down some very specific rules for them. First and foremost, they must require all individuals and very small businesses--say, those with under 10 employees--to buy insurance through the exchange. Otherwise, they note, the insurance companies, which would rather cover all of each employer's workers than have them able to choose among plans, will create incentives for firms with healthy employees to purchase coverage outside the exchange and will steer the sicker individuals and firms to the government-sponsored insurance market. This is what is known as adverse selection. It pushes up insurance rates inside the exchange and discourages people from buying insurance there, leading to a death spiral.

The current reform proposals would require only individuals and small firms that receive government insurance subsidies to buy through the exchanges. Moreover, under the House bill, the 14 million people who already have individual insurance that they bought on their own would be able to keep it.

In the view of Lee and Grgurina, that is not enough to prevent adverse selection. They would require all individuals and small firms to buy coverage through the exchanges, and would allow somewhat larger companies--with, say, up to 100 employees--to buy through the exchanges, as well, to provide critical mass. They would also have the same insurance regulations, including those regarding benefit design and rating methods, apply inside and outside the exchanges. Insurers would be prohibited from marketing only to healthy people outside the exchanges, and they would have to participate in the exchanges in order to sell insurance to small businesses and individuals.

These ideas are all sensible and could prevent a disaster from occurring in these exchanges, which are so vital to the reform enterprise. Is anybody in Washington listening?